Allied World acquisition would allow ‘further diversification’ of Fairfax’s insurance business: A.M. Best

The corporate parent of Toronto-based Northbridge Insurance “should benefit from further diversification of its business” if it acquires commercial insurer and reinsurer Allied World Assurance Company Holdings AG, A.M. Best Company Inc. has suggested.

Fairfax Financial Holdings Ltd. – which also controls OdysseyRe and the Harvey’s fast food chain – announced Sunday its board of directors unanimously approved an agreement, valued at nearly US$5 billion, to acquire Allied World. The Canadian operation of Allied World writes privacy breach, directors and officers, representations and warranty and energy risks, among other commercial coverages.

In addition to OdysseyRe and Northbridge, Toronto-based Fairfax’s existing holdings include Lloyd’s insurer Brit PLC, Crum & Forster and Zenith National.

The agreement to acquire Allied World is subject to Allied World shareholders as well as approval from insurance, securities and competition regulators. Depending on how much stock Fairfax issues to Allied World shareholders, the deal could also be subject to the approval of Fairfax shareholders. Allied World shareholders would receive a combination of Fairfax subordinate voting shares and cash equal to $US54 per Allied World share.

“Fairfax has the option to replace on a dollar-for-dollar basis this portion of the stock consideration with cash in an amount up to $30.00 per Allied World Share, together with the dividend, for up to a total cash consideration of $40.00 per Allied World Share,” Fairfax said in a release Sunday.

Fairfax has the option to “fund the $30.00 in cash by an equity or debt issuance or by bringing in third party partners,” the company noted.

“The proposed deal structure affords Fairfax flexibility in terms of financing and management of downside risk,” stated A.M. Best in a press release Tuesday. “In keeping with its practice of maintaining operating autonomy at its subsidiaries, Fairfax does not intend to integrate Allied World’s operations, other than investment management.”

Fairfax chairman and CEO Prem Watsa (who founded the firm in 1985) said Monday during a conference call that he intends to keep Allied World under the leadership of Scott Carmilani, president, CEO and Chairman of Allied World.

“A.M. Best expects minimal impact on Allied World’s historically strong underwriting performance,” the Oldwick, N.J.-based ratings firm stated Tuesday. “Additionally, Fairfax should benefit from further diversification of its business, reinsurance opportunities, and the advantages that may ultimately be derived from Allied World’s rating profile.”

Allied World’s coverages include commercial general liability, professional and environmental.

“Northbridge is a middle market industry focused commercial writer in Canada, one of the largest players in the Canadian commercial market,” Andy Barnard, president and chief operating officer of the Fairfax Insurance Group, said Monday during the conference call.

“On the [primary] insurance side we really see a rather different profile of business from Allied World than what we currently have in our Fairfax companies,” Barnard added.

Morristown, N.J.,-based Crum & Forster “is very much a specialty company,” Barnard noted.

“The acquisition of Allied World is the largest by Fairfax to date,” A.M. Best stated in its release.

Earlier this month, Stamford, Conn.-based OdysseyRe announced it received regulatory approval to open a new branch office, for its Newline subsidiary, in Cologne, Germany.

Newline writes international casualty and cargo coverage, and the new Cologne office gives the firm a “platform” within the European Union “for potential expansion into neighboring territories,” stated Carl Overy, chief executive officer of London-based Newline Group, in a release.

Another recent Fairfax acquisition agreement was American International Group Inc.’s local commercial and consumer operations in Turkey and six South American nations. That deal was announced Oct. 18.

Four months earlier, Fairfax announced it agreed to acquire Zurich Insurance Company South Africa Limited and 80% of Indonesia-based PT Asuransi Multi Artha Guna Tbk (AMAG).

Fairfax acquired a majority of Lloyd’s insurer Brit in 2015.

Also that year, Fairfax agreed to acquire the general insurance operations – in the Ukraine Czech Republic, Hungary and Slovakia – of QBE Insurance (Europe) Ltd. Around the same time, Fairfax’s Pacific Insurance subsidiary completed the acquisition of the general insurance business of Malaysia-based MCIS Insurance Berhad.

On Dec. 19, 2016, Fitch Ratings placed the A+ insurer financial strength rating of Allied World on rating watch negative, which “reflects the uncertainty whether ownership by Fairfax will constrain Allied World’s ratings.”

Fairfax is publicly traded but a significant minority of voting shares are owned by The Sixty Two Investment Company Ltd., which is controlled by Watsa.

Non-insurance companies which Fairfax owns or effectively controls include Cara Operations, The Keg chain of steak restaurants, William Ashley China and Sporting Life. Cara owns Harvey’s Swiss Chalet, Milestone’s and Montana’s, among others.